Accounting question, the answers showed thats filled in are wrong. Lilly Company
ID: 2452807 • Letter: A
Question
Accounting question, the answers showed thats filled in are wrong.
Lilly Company is planning to buy a set of special tools for its grinding operation. The cost of the tools is $18,000. The tools have a three-year life and qualify for the use of the three-year MACRS. The tax rate is 40 percent; the cost of capital is 12 percent. You must use the Exhibit 19B.1 and Exhibit 19B.2 present value tables and Exhibit 19.5 to solve the following problems. Calculate the present value of the tax depreciation shield, assuming that straight-line depreciation with a half-year life is used. Round intermediate calculations and your final answer to the nearest dollar. Calculate the present value of the tax depreciation shield, assuming that MACRS is used. Round intermediate calculations and your final answer to the nearest dollar. What is the benefit to the company of using MACRS?Explanation / Answer
1)
Under Straight Line Depreciation Method
Annual Depreciation = (Cost-salvage value)/Useful Life
Annual Depreciation = (18000-0)/3
Annual Depreciation = 6000
Depreciation in Year 1 = Annual Depreciation * 1/2
Depreciation in Year 1 = 6000*1/2
Depreciation in Year 1 = 3000
Depreciation in Year 2 = 6000
Depreciation in year 3 = 6000
PV of Depreciation Tax Shield = Depreciation in Year 1 *tax rate*PV(12%,1) + Depreciation in Year 2 *tax rate*PV(12%,2) + Depreciation in Year 3 *tax rate*PV(12%,3)
PV of Depreciation Tax Shield = 3000*40%*0.893 + 6000*40%*0.797 + 6000*40%*0.712
PV of Depreciation Tax Shield = $ 4693
2)
Under MACRS METHODS
Depreciation in Year 1 = 0.3333*18000
Depreciation in Year 1 = 6000
Depreciation in Year 2 = 0.4445*18000 = 8001
Depreciation in year 3 = 0.1481*18000 = 2666
PV of Depreciation Tax Shield = Depreciation in Year 1 *tax rate*PV(12%,1) + Depreciation in Year 2 *tax rate*PV(12%,2) + Depreciation in Year 3 *tax rate*PV(12%,3)
PV of Depreciation Tax Shield = 6000*40%*0.893 + 8001*40%*0.797 + 2666*40%*0.712
PV of Depreciation Tax Shield = $ 5453
3)
Less income can be reported on the income statement for the beginning period & less income tax payable in beginning period